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Weekly Market Review:
Q3 earnings season doesn’t officially begin for about 2 weeks. However, since not all companies follow a regular calendar quarter, 10 (2%) of the companies in the S&P 500 have already reported results so far in Q3, and below are the beat rates relative to the final results from recent quarters. Don’t extrapolate these results yet, as it is still very early in the reporting season.
Quarter EPS beats Rev beats
Q3 ‘21 80% 60%
Q2 ‘21 86% 83%
Q1 ‘21 87% 72%
Q4 ’20 78% 69%
Q3 ‘20 84% 74%
Q2 ‘20 85% 65%
Q1 ‘20 65% 59%
Q4 ’19 74% 64%
Q3 ‘19 78% 58%
Q2 ‘19 76% 56%
Q1 ‘19 77% 57%
Q4 ’18 73% 60%
Q3 ’18 82% 61%
Q2 ‘18 84% 72%
Q1 ‘18 81% 74%
Average 79% 65%
From a growth standpoint, Q3 earnings are +14.8% y/o/y so far versus the current +28% estimate. Q3 revenue is +16.0% y/o/y versus the current +15% estimate. This compares to +92.0% and +25.3% respectively in all of Q2. This week, 8 S&P 500 companies reported earnings and 7 of them beat expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.
Better (or higher) than expected:
- NAHB Housing Market Index for Sep: 76 vs. 74 est
- Housing Starts for Aug: 1,615k vs. 1,550k est
- Building Permits for Aug: 1,728k vs. 1,600k est
- Leading Economic Indicators for Aug: +0.9% vs. +0.7% est
- New Home Sales for Aug: 740k vs. 720k est
Worse (or lower) than expected:
- Existing Home Sales for Aug: 5.88m vs. 5.89m est
- Initial (weekly) Jobless Claims: 351k vs. 320k est
This was a rather light week for economic data. At 351k, Initial Jobless Claims came in above the 320k estimate and above last week’s 335k level. Claims are now averaging 336k for the past 4 weeks; a new post-pandemic low. However, this is the second consecutive weekly uptick, which is concerning since I had been expecting the downtrend to continue now that the enhanced unemployment benefits have ended. Aggregate initial jobless claims over the past 79 weeks (since the virus hit) exceed 93M.
Source: Schwab Center for Financial Research
Past performance is no guarantee of future results.
Market Performance YTD
Here is the 2021 YTD (versus 2020 full-year) performance of the market broken down by the 11 market sectors (as of the close on 9/23/21):
2021 YTD 2020 Final Category
- Energy +34.0% -37.3% Defensive
- Financials +29.1% -4.1% Cyclical
- Real Estate +27.7% -5.2% Cyclical
- Communications Svc +24.3% +22.2% Defensive
- Info Tech +20.1% +42.2% Cyclical
- Healthcare +16.8% +11.4% Defensive
- Industrials +13.6% +9.0% Cyclical
- Consumer Disc +12.8% +32.1% Cyclical
- Materials +11.9% +18.1% Cyclical
- Cons Staples +5.5% +7.6% Defensive
- Utilities +3.9% -2.8% Defensive
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
Here is the 2021 YTD (versus 2020 full-year) performance of the major U.S. equity indices (as of the close on 9/23/21):
2021 YTD 2020 Final
- S&P 500 (SPX) +18.4% +16.3%
- Nasdaq Composite (COMPX) +16.8% +43.7%
- Dow Industrials (DJI) +13.6% +7.2%
- Russell 2000 (RUT) +14.4% +18.4%
Last week I stated, “While it remains to be seen if the bargain hunters will show up again, we appear to be at a critical turning point right now…next week is likely to head sharply higher or sharply lower fairly quickly”. Indeed, the SPX dropped 2.9% on Monday (9/20) before rebounding in the final 30 minutes of the day to finish -1.7%. Even with the late-day rally, it was the single largest down day in over 4 months.
To be honest, with the slow, steady decline we had been experiencing in September, I had little reason to believe that the chart pattern would resemble the previous dips and rebounds we had seen this year. However, as we have seen time and time again, “history doesn’t always repeat itself, but it often rhymes”. Notice how similar the drop and bounce in September looks to the drop and bounce in July. That, of course leads to the question of whether the next few days will also be similar. If it is, there should be more upside next week.
For now, the SPX remains about 2% below its all-time high, so 4,536 is still the upside resistance level to watch. To the downside, keep your eye mostly on the 50-day SMA (currently 4,439) and the 100-day SMA (currently 4,337).
Source: StreetSmart Edge®
Past performance is no guarantee of future results.
In the week following the quadruple witching (quarter-end) options expiration (on Friday 9/17), September option volumes are averaging a very robust 39.2M contracts per day; above the final August level of 36.6M contracts per day and well above the September 2020 level of 31.9M contracts per day. January 2021 remains the all-time record month with 44.3M contracts per day, and February 2021 is second with 43.3M contracts per day.
The following data comes from the Chicago Board Options Exchange (Cboe) where about 98% of all index options, about 20% of all Exchange Traded Product (ETP) options, and about 14% of all equity options are traded:
In reviewing the VIX OI Change for the past week I observed the following:
- VIX call OI was +7.1%
- VIX put OI was +27.2%
These sharp increases are at least partly due to replacement activity following the September monthly option expiration on Wednesday (9/15). However, there is a very clear bias toward the put side, so I see the VIX OI Change as bullish for the market in the near-term.
As a result of the September monthly contract expiration on Friday (9/17), the follow changes are calculated from Monday (9/20) instead.
In reviewing the SPX OI Change for the past week I observed the following:
- SPX call OI was +9.4%
- SPX put OI was +5.9%
While SPX volume tends to be mostly institutional hedging, these changes reflect a bias toward the call side, so I see the SPX OI Change as bullish for the market in the near-term.
In reviewing the ETP OI change (which includes SPY, QQQ, DIA & IWM) for the past week I observed the following:
- ETP call OI was +9.0%
- ETP put OI was +7.8%
These changes reflect a small bias toward the call side, so I see the ETP OI Change as moderately bullish for the market in the near-term.
In reviewing the Equity OI Change for the past week I observed the following:
- Equity call OI was +7.7%
- Equity put OI was +7.0%
These changes reflect a very small bias toward the call side, so I see the Equity OI Change as moderately bullish for the market in the near-term.
Index OI Participation is +16.5% versus 2020 levels, so I see it as bullish in the long-term.
Equity/ETF OI Participation is +23.2% versus 2020 levels, so I see it as bullish in the long-term.
Open Interest Put/Call Ratios (OIPCR):
The VIX OIPCR is up 11 ticks to 0.69 versus 0.58 last week. This sizable uptick is being exaggerated by replacement activity following the September expiration (on Wednesday 9/15). While this ratio tends to move in the same direction as the VIX index, this is clearly counter to the VIX which was -2.18 (-10.5%) through Thursday (9/23). As a result, it likely indicates that participants are expecting the VIX to fall even further. At the risk of overstating the impact of expiration, I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio remains well below its recent 3-month high and well below the 200-day SMA of 0.76, so I see it as neutral in the long-term.
The SPX OIPCR is down 5 ticks to 2.37 versus 2.42 last week. While normally this ratio tends to move in the same direction as the SPX, this downtick is likely being exaggerated by the monthly contract expiration on Friday (9/17). Still this downtick is counter to the SPX which has risen 15.99 points (+0.4%) through Thursday (9/23). At this level, it indicates that SPX option traders (who are almost entirely institutional) have not yet replaced expired hedges and may be expected some modest upside in the SPX. Therefore, I see the SPX OIPCR as moderately bullish in the near-term for the market. This ratio is now only about 6 ticks below its 16-month high reached in July, but it remains above the 200-day SMA of 2.18. I see it as neutral in the long-term.
The normally very stable Equity OIPCR is down 1 tick to 0.79 this week versus 0.80 last week. At this level it implies that equity option traders (which includes a lot of retail traders) have maintained nearly the same level of bullishness as last week. In fact, this ratio has barely moved for 9 weeks now. Therefore, I see the Equity OIPCR as moderately bullish in the near-term for the market. This ratio also remains just slightly above the 200-day SMA (currently 0.77), so I see it as moderately bullish in the long-term too.
Cboe Volume Put/Call Ratios (VPCR):
The Cboe VIX VPCR has moved from moderately bullish to neutral this week. The 0.79 reading on Thursday (9/23) was neutral but the current reading of 2.99 as I’m writing this (mid-day Friday 9/24) is very bullish. While this ratio tends to decline as the day goes on, it would take a lot of activity to move this one back down. As a result, I see it as bullish in the very near-term.
The Cboe SPX VPCR has been moderately bearish all week. The 1.78 reading on Thursday (9/23) was moderately bearish, and the current reading of 1.92 as I’m writing this (mid-day Friday 9/24) is moderately bearish. While intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day moving average of 1.86 versus 1.94 last week, it is also moderately bearish in the long-term.
The Cboe Equity VPCR has moved from bullish (<0.50) to a bullish extreme (<0.45) this week. The 0.43 reading on Thursday (9/23) was a bullish extreme, but the current reading of 0.65 as I’m writing this is neutral. Since this ratio tends to decline as the day goes on, I see it as bullish in the very near-term. With a 5-day moving average of 0.49 versus 0.51 last week, I see it as bullish in the long-term. As noted below, long-term for this ratio is about a week or two.
Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week or two.
OCC Volume Put/Call Ratios (VPCR):
The OCC Index VPCR has moved from bearish (>1.40) to moderately bearish (>1.10) to this week. As a result, I see it as moderately bearish in the near-term. It has been mostly bearish for the past 8 weeks though, so I see it as bearish in the long-term.
The OCC Equity VPCR has moved from moderately bullish (<0.80) to bullish (<0.63) this week, so I see it as bullish in the near-term. With a 5-day average of 0.67 versus 0.63 last week, it is moderately bullish in the long-term.
Cboe Volatility Index (VIX)
At the time of this writing (mid-day Friday 9/24), the VIX is -0.03 to 18.60. At its current level, the VIX is implying intraday moves in the SPX of about 43 points per day (this was 46 last week). The 20-day historical volatility is 144% this week versus 124% last week. The VIX is now back below its long-term average (19.54) but still well above its long-term mode (12.42) which I consider to be “normal” volatility. While the VIX has dropped more than 10 points from its intraday high earlier this week, I see the VIX as moderately bullish in the very near-term for the equity markets. However, with the VIX still more than 4 points above its YTD low, I see it as neutral in the long-term.
On a week-over-week basis, VIX call prices have risen modestly while VIX put prices have fallen sharply. At +132 versus +30 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is sharply higher, but at this level is still neutral in the very near-term. The VIX IV Gap has gone from sharply negative back to positive this week, so I see it as volatile in the long-term.
Keep in mind, this is not only a contrarian indicator most of the time, it tends to be one of the earliest and shortest-term indicators I discuss in this report, so it can also change directions very quickly.
As of this writing (mid-day Friday 9/24) the nearest VIX futures contract (which expires on 9/29) was trading at 20.00; nearly 1½ points above the spot VIX level of 18.60. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 19.62; still about a point above the spot price.
With an adjusted level that is about a point above the spot price, futures traders are indicating that they believe the VIX is likely to tick modestly higher over the next few days. Therefore, I see VIX futures as moderately bearish in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 18.96 and 19.29 respectively. With the RPAPs of the further-dated contracts both just slightly above the spot price, I see VIX futures as neutral in the long-term for the SPX.
Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.
With the VIX up sharply early in the week and down sharply in the past 2 days, the VIX Hedging Effectiveness is Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing at good sensitivity to market volatility, and may be at effective as hedging tools in the very near-term. VIX Hedging Effectiveness is Moderate in the long-term.
VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.
Last Friday I stated that the Evergrande situation, “bears watching closely in the coming days”. Indeed it was the primary catalyst for the big downturn on Monday (9/20), and it was one factor that contributed to the “Breakout” forecast for this week. While markets have rebounded as the week progressed, this situation is far from over. Dollar denominated bonds issued by Evergrande were scheduled to receive an $83M interest payment on Thursday (9/23) but the company failed to make it, without issuing a statement about when or if it might. As a result, equity shares of the troubled property developer dropped another 12%. At this point, Chinese authorities have not yet declared the company in default and may simply leave investors guessing for another month.
Separately, on Friday (9/24), the People's Bank of China (PBOC) officially declared all cryptocurrency mining and transactions illegal in China. Back in April of this year, it was estimated that nearly half of all crypto-mining was being done in China, thus Bitcoin dropped about 40% in May when China made similarly restrictive remarks. At the time of this writing (mid-day Friday 9/24) Bitcoin was down about 8% and Ethereum was down about 7%.
As the chart below shows, the Centers for Disease Control (CDC) reported this week that the US is now averaging about 160,000 new cases per day (versus 200,000 last week). It’s a relief to see a downtick again after last week’s rise.
Source: Bloomberg L.P.
As the chart below shows, vaccination rates ticked down to about 600k per day (versus 700k last week). While cases are down slightly this week, it is concerning to see vaccination rates fall too. Unfortunately, there have been so many other high profile news events this week, this topic is probably not top-of-mind at the moment.
Source: Bloomberg L.P.
Economic reports for next week:
Durable Goods Orders for Aug – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.
Case-Shiller Home Price Index for Jul – This index measures the change in the average prices of single-family, residential real estate across a broad section of 20 major cities in the US.
Conference Board Consumer Confidence for Sep – There are several other confidence measures, such as the University of Michigan Consumer Sentiment, and they don’t always agree. Gasoline prices and stock market performance tend to have the biggest impact on these measures.
Pending Home Sales Index for Aug – This report measures actual contracts signed, whereas existing sales (reported last week) measures actual closings, so this one is slightly more forward looking. This one will usually only affect equity markets adversely if it comes in very low.
GDP for Q2 – This is the third estimate (Final) for Q2 and since this data is now 3 months old, any revision is likely to be ignored by the markets. You’ll recall that the second (Preliminary) report in Q2 showed +6.6%.
Initial Jobless Claims - For the week ending 9/18/11, claims were up 16k after being up 23k the prior week. The 4-week moving average now stands at 336k, down 1k from the prior week, and still well above the pre-pandemic level of 233k.
Chicago PMI for Sep – This report is a gauge of business conditions within manufacturing and service firms in the Chicago area. A reading above 50 indicates expansion and a reading below 50 indicates contraction.
Personal Consumption Expenditures (Core PCE) for Aug – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports and services. This is the Fed’s preferred inflation gauge.
Personal Income & Spending for Aug – These reports use data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.
ISM Manufacturing Index for Sep - The Institute for Supply Management (ISM) Manufacturing Index tracks economic data from companies in the manufacturing sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the manufacturing sector are on the rise.
Construction Spending for Aug – Construction spending measures new overall construction activity. This report can predict future activity in housing and commodities, which can be a sign of economic growth.
University of Michigan Consumer Sentiment for Sep – This is the Final report for Sep. At 71.0, the mid-month report was higher than 70.3 in the prior month.
On Wednesday (9/22) the FOMC held a regularly scheduled meeting in which they announced no change in interest rate policy, as expected. And while bond purchases will continue for now, they did set the stage for tapering later this year, without specifying a date; so probably in November.
Interestingly, rates moved very little when the policy statement was released at 2:00 PM ET, but began to rise a few hours later. That move accelerated on Thursday (9/23) and continued into Friday (9/24). After starting the week at just 1.31%, interest rates on the 10-year Treasury Note ($TNX) have risen to 1.45% at the time of this writing.
While many of the concerns that sparked the selloff early in the week remain, bargain hunters have come roaring back and activity indicates the strong rebound is likely to continue into next week.
With the SPX dropping 2.9% on Monday (9/20) before rebounding in the final 30 minutes of the day to finish -1.7%; the largest down day in over 4 months, I think it’s safe to say that last week’s outlook of “Breakout” was definitely on target. But just as we’ve seen so many times in the past, the bargain hunters were ready to pounce and have sparked an equally fierce rebound.
As you can see below, there were several upgrades and no downgrades this week, thus the sentiment has shifted dramatically in a more bullish direction. While many of the concerns that caused the equity rout early in the week remain, market activity overwhelmingly indicates that most participants believe equities will continue to climb back towards new highs again. Despite a 3% rebound already (from the intraday low on Monday 9/20) the outlook for next week is Bullish.
Past performance is no guarantee of future results.
OI = Open Interest
OIPCR = Open Interest Put/Call Ratio
VPCR = Volume Put/Call Ratio
IV = Implied Volatility
+ means this indicator has changed in a bullish direction from the prior posting.
– means this indicator has changed in a bearish direction from the prior posting.
+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.
^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.